Financial Review

Our development pipeline continues to advance providing clear evidence of future growth.

FY2013 was a successful year for Consort Medical, with continuing growth in Bespak revenue and profits, and strong cash generation from operations. Our development pipeline continued to advance, providing clearer evidence of future growth, with the launch of the Chiesi NEXThaler and the award of the multi-year exclusive supply agreement from Nicoventures. The sale of King Systems was completed in February 2013, providing a full value for the current and future prospects for that business. The Company invested further in the equity of Atlas Genetics, as the technology moves closer to commercialisation.

Richard Cotton

Income Statement

1) Like for like1 trading performance

2013
Continuing
operations
£000
2013
Discontinued
operations
£000
2013
Total
£000
2012
Total
£000
2012
Disposal
of King
£000
2012
Like for
like1
£000
Revenue from products and service95,04434,486129,530136,580(8,739)127,841
Operating profit before special items18,1033,37621,47921,537(667)20,870
Profit before tax and special items16,1883,36519,55319,388(666)18,722

On a like for like basis1, revenue from products and services increased by £1.7m (1.3%) to £129.5m (FY2012: £127.8m). Bespak revenue from products and services rose by £1.5m (1.7%) to £95.0m (FY2012: £93.5m) and King revenue from products and services rose by £0.2m (0.4%) to £34.5m (FY2012: £34.3m).

On a like for like basis1, operating profit before special items increased by 2.9% to £21.5m (FY2012: £20.9m). Bespak's operating profit before special items grew 6.6% to £19.5m (FY2012: £18.2m) with its operating margin increasing to 20.5% (FY2012: 19.5%). King Systems' operating profit before special items decreased 23.0% to £2.0m (FY2012: £2.6m) with its operating margin declining to 5.9% (FY2012: 7.6%).

On a like for like basis1, profit before tax and special items increased by £0.9m (4.4%) to £19.6m (FY2012: £18.7m).

2) Statutory trading performance

Following the disposal of King Systems, the Group's income statement has been re-stated to include profit after tax from King Systems within discontinued operations and the comparative figures for the rest of the income statement have been restated accordingly.

Revenue from products and services on continuing operations (entirely attributable to the Bespak division) grew 1.7% to £95.0m (FY2012: £93.5m).

Operating profit from continuing operations before special items increased by £1.6m (10.1%) to £18.1m (FY2012: £16.5m). Profit before tax on continuing operations before special items increased by £1.9m (13.2%) to £16.2m (FY2012: £14.3m). Profit before tax after special items from continuing operations decreased by £0.2m (1.5%) to £14.7m (FY2012: £14.9m). Profit after tax before special items from continuing operations increased by £1.7m (14.7%) to £13.0m (FY2012: £11.3m).

Profit after tax before special items from discontinued operations decreased by £0.8m (22.0%) to £2.8m (FY2012: £3.6m). Profit after tax and special items from discontinued operations increased by £11.0m to £13.3m.

Adjusted EPS from continuing and discontinued operations increased by 5.2% to 54.9p per share (FY2012: 52.2p). The basic aggregate EPS increased by 71.7% to 84.9p per share (FY2012: 49.5p) due to the gain on disposal of King Systems (see note 11).

Taxation

The tax charge from continuing and discontinued operations for the year was £3.5m. The tax charge before special items from both continuing and discontinued operations of £3.8m reflects an effective rate of 19.4% (FY2012: 23.0%).

The tax charge before special items on continuing operations (see note 10 to the financial statements) was £3.2m resulting in an effective rate of 19.7% (FY2012: 20.8%). The R&D tax credit claims in the UK, a falling UK tax rate and finalisation of brought forward liabilities contributed to the reduced overall tax charge.

The tax credit from discontinued operations (see note 28) of £0.1m reflects the fact that no tax was charged against the gain on disposal, as the substantial shareholder exemption was available to the Group. The tax charge before special items from discontinued operations was £0.6m at an effective rate of 17.5% which was lower than the statutory rate due to the receipt of an R&D tax credit in the period up to disposal attributable to King Systems.

Dividend

The Board is proposing a 5% increase in the final dividend per share of 12.71p (FY2012: 12.1p) such that the total dividend for the period amounts to 19.71p (FY2012: 19.1p) as set out in note 12 to the financial statements. The final dividend will be paid on 25 October 2013 to shareholders on the register on 20 September 2013. Dividend cover, based on earnings before special items, was 2.8 times (FY2012: 2.7 times). At the 30 April 2013 share price of 800p this represented a yield of 2.5%.

Special Items from Continuing Operations

Special items from continuing operations of £1.9m consist of £0.9m of amortisation of intangible assets created on the acquisition of the Medical House in 2009, a charge of £0.5m against an operating lease from the Medical House and other costs of £0.2m. The Group also incurred a one off tax charge of £0.7m in respect of the recognition of a deferred tax liability following the announcement to re-open the site at Milton Keynes offset by the tax effect of the above special items of £0.4m. See note 6 to the financial statements.

Discontinued Operations

On 15 February 2013, Consort Medical completed the sale of King Systems to Ambu A/S. This followed a number of unsolicited approaches from parties interested in acquiring the business.

The upfront consideration was £77.4m ($120.0m), which following adjustments for working capital increased to £79.6m ($123.3m). This represents a 17.3 multiple of the FY2012 EBITDA. Given the anticipated near term improvements expected in the financial performance of the business at the time of sale, contingent consideration mechanisms were agreed as a central element of the value realisation from the disposal. The first was a £6.5m ($10.0m) lump sum payment upon the launch of the King Vision next generation blade. The second element was a three year earn out of up to $40.0m based on the King Vision sales in the period from 1 May 2013 to 30 April 2016: £12.9m ($20.0m) of this was based on the King Systems business plan at the time of sale, with a further £12.9m ($20.0m) upside for up to 100% outperformance of that plan. Payment of the £6.5m ($10.0m) lump sum plus the first £12.9m ($20.0m) of the earn-out would equate to a valuation multiple of 21.5x FY2012 EBITDA; payment of the full £32.3m ($50.0m) would equate to a valuation multiple of 24.3x FY2012 EBITDA.

The disposal has been accounted for as follows and is included within special items from discontinued operations as set out in note 28 to the financial statements:

£m
Cash proceeds79.6
Fair value of contingent consideration receivable11.5
Net assets disposed(78.0)
Disposal costs(4.9)
Recycling of foreign exchange gains from reserves2.7
Gain on disposal10.9

Other special items from discontinued operations include £1.1m of amortisation of intangible assets recognised on the acquisition of King Systems in 2005 and £0.2m of restructuring costs in respect of the King transformation programme, offset by a £0.2m credit on the unwind of the discount on the contingent consideration receivable from Ambu and the tax effect of the above special items of £0.7m.

Revenue from discontinued operations decreased by £8.6m (20.0%) to £34.5m (FY2012: £43.1m). Profit before tax and special items from discontinued operations decreased by £1.7m (33.8%) to £3.4m (FY2012: £5.1m).

Investment in Atlas Genetics

In April 2013, the Group made a further investment of £1.1m in Atlas Genetics Limited: this was the second tranche of the funding initiated in July 2011, when the Group invested £1.4m, adding to the £1.2m invested in a previous funding round in February 2011. The Group's total investment to date now stands at £3.7m as set out in note 16 to the financial statements. Substantial progress has been made in the last year in the point-of-care ("POC") diagnostics card development — in conjunction with Bespak — and with the development of the card reader and assay tests. The Group now holds 16.9% of the equity, or 15.7% on a fully diluted basis. The other equity partners include Novartis Venture Funds, Johnson & Johnson Development Corporation, Life Science Partners and BB Biotech Ventures. The third tranche of this round of funding is due in March 2014, and the Group may invest a further £0.5m. We continue to believe that having been joined as co-investors by two leading healthcare companies with significant diagnostic interests and two leading Life Science investors, that their investment underlines the great potential of Atlas. The additional funding is expected to be sufficient to launch the current products for the detection of chlamydia and gonorrhoea as well as to start development of diagnostic tests for other infectious diseases.

Bespak has retained its long term manufacturing rights to the disposable card used in the Atlas system and continues with an arm's length development contract to design for manufacture and scale up production of the disposable card. The Group will continue to account for Atlas as an equity investment in the accounts of Consort Medical plc.

Inorganic Investment

Following the sale of King Systems, the Group has significant cash resources available to invest in relevant and value enhancing investments. The Group's strategy is discussed in the Chairman's Letter, Why Invest , Our Business Model, Group at a Glance, Key Products and Intellectual Property, Development Portfolio, Our Markets and Our Strategy: this highlights the Group's area of focus and the opportunities available to it for acquisitions. Such acquisitions would be appraised against strict criteria for closeness of strategic fit, availability, integration, valuation and value creation.

  1. Like for like basis adjusts the comparative figures to reflect the fact that King Systems was disposed of on 15 February 2013.
  2. Bespak (£19.5m) and King (£2.0m) operating profit before special items performance measures are prepared on a basis that is consistent with the historical segmentation analysis. Operating profit before special items is reconciled in total to the Group statutory accounts (£21.5m).

The sale of King Systems completed in February 2013 provided full value for the current and future prospects for that business.

Balance Sheet

Following the disposal of King Systems in February 2013, the Consort Medical balance sheet has been materially strengthened. Year-end Net Cash was £37.0m (FY2012: Net Debt (£37.7m)). With headroom of £76.1m under its undrawn banking facility, and a further £25.0m available under the accordion facility, the Group has significant available cash resources. Gross assets were £142.5m (FY2012: £182.8m). The pension deficit increased to £11.8m (FY2012: £3.4m) and is reviewed separately below. Provisions fell from £3.7m at the beginning of the period to £2.6m at 30 April 2013.

Cash Flow, Financing and Liquidity

1) Like for like cash flow performance

2013
Continuing
operations
£000
2013
Discontinued
operations
£000
2013
Total
£000
2012
Total
£000
2012
Disposal
of King
£000
2012
Like for
like1
£000
EBITDA before special items23,9694,29328,26228,348(1,183)27,165
Cash flow from operating activities20,01518,426(860)17,566
Working capital8,38116,096(6,700)9,396

Like for like Cash Flow from Operating Activities1 increased to £20.0m (FY2012: £17.6m).

Like for like EBITDA1 before special items was up £1.1m (4.0%) at £28.3m (FY2012: £27.2m). Working Capital on a like for like basis was down at £8.4m (FY2012: £9.4m) representing 8.8% of revenue (FY2012: 10.1%) following a sustained tightening of working capital management processes throughout the year.

2) Statutory cash flow performance

Cash Flow from Operating Activities increased by £1.6m (8.6%) to £20.0m (FY2012: £18.4m). EBITDA before special items decreased by £0.1m (0.3%) to £28.3m (FY2012: £28.4m). Working Capital reduced by £4.8m or 41.4% due to the disposal of King Systems during the year.

Capital expenditure of £11.0m (FY2012: £12.1m) was lower than the previous year, which saw investment in the King Systems transformation programme draw to a close. Net cash received on disposal of King Systems totalled £74.7m of which £57.1m was used to repay the Group's debt in full leaving the Group balance sheet in a net cash position of £37.0m (2012: Net debt £37.7m).

The Group refinanced its principal bank facilities in June 2012 with the Royal Bank of Scotland (RBS) and HSBC. In order to eliminate the risk of volatile currency movements affecting our headroom, we have continued to split our main facilities into two revolving credit facilities (RCFs).

The first RCF is for $56m (undrawn at 30 April 2013) and the second RCF is for £40m (also undrawn at 30 April 2013). These facilities total £76.1m and will expire in November 2016. Margins remained unchanged from the old facilities, with a cost of between two and three percent over LIBOR depending upon the ratio of net debt to EBITDA prevailing at the time. A non-utilisation fee of 40% of the interest margin on the undrawn balance applies.

Under the terms of the refinancing, the Group also has a £25m "accordion" facility, by which further facilities may be made available by RBS and HSBC under the current terms to support significant investment or acquisition opportunities which may arise.

The Group maintains levels of sterling cash sufficient to meet imminent obligations and to be a reserve in case of an adverse event. These funds are invested with a range of reputable financial institutions approved by the Board.

With net cash on the balance sheet, the Group clearly remains comfortably within both its headroom and its covenants. Taking into account the cash balances available, the total headroom at the period end was £113.1m (FY2012: £28.8m).

Foreign Currency and European Exposure

The Group monitors its foreign currency exposures carefully and seeks to mitigate all material transactional exposures. The Group currently has low exposure to movements in the euro and US dollar movements. Where necessary we buy or sell forward currency to protect current period transactions.

The Group does have significant sales into the Euro zone. We are vigilant as to the growing risks in Europe, but it is an important feature of our market that our customers are generally very profitable and stable entities for whom our products are generally a small part of the total cost of sales. The majority of them purchase product from us in GB pounds and they are generally unable to change their supply chains due to the regulatory environment in the short or even medium term. We continue to monitor the situation closely.

Pension Scheme

Bespak operates a defined benefit pension scheme in the UK that is closed to new employees, who are eligible to join a defined contribution pension scheme (see note 21 to the financial statements). As at 30 April 2013, the deficit under IAS19 reporting requirements was £11.8m compared with £3.4m as at 30 April 2012. The movement was primarily as a result of gross liabilities increasing to £91.3m (FY2012: £71.5m) due to abnormal conditions in the global markets that have further depressed discount rates, partially offset by a recovery in asset values. The Group completed its triennial revaluation of the pension scheme as at 30 April 2011, at which point the pension scheme was in a small actuarial surplus. The next triennial actuarial valuation will take place as at 30 April 2014.

Risk Management

The Group considers effective risk management to be a high priority. Specific risk management activities are reviewed in Principal Risks & Uncertainties. We are pleased to report that the Group incurred no material financial or business losses despite the riskier economic and business environment.

Richard Cotton

Chief Financial Officer

  1. Like for like basis adjusts the comparative figures to reflect the fact that King Systems was disposed of on 15 February 2013. A reconciliation of the like for like figures to the statutory accounts is included in the Finance Review.
  2. Bespak (£19.5m) and King (£2.0m) operating profit before special items performance measures are prepared on a basis that is consistent with the historical segmentation analysis. Operating profit before special items is reconciled in total to the Group financial statements (£21.5m).

King Systems Video Laryngoscope

Fast Fact:

Disposal of King

  • Up-front consideration of £79.6m ($123.3m) at 17.3x FY2012 EBITDA;
  • Potential contingent consideration of up to £32.3m ($50.0m);
  • Maximum contingent consideration would lead to a 24.3x FY2012 EBITDA multiple.